BIC has published the interim executive remuneration report produced by its purposeful company taskforce which is developing a range of policy recommendations. The steering group for the report include Tom Gosling, leader of PwC’s UK reward practice and Andy Haldane, chief economist at the Bank of England.

The report puts forward four proposals to help align executive incentives better with long-term purposeful behaviour and to help rebuild public confidence in executive pay. The first is that shareholder guidelines and the UK corporate governance code should enable companies to adopt simpler pay structures for CEOs based on long-term equity and debt holdings to encourage long-term behaviour and to avoid the unintended consequences of over-reliance on performance-based incentives.

Packages should be structured to ensure CEOs rapidly (within two years of appointment) build up shareholdings of at least two times the value of a year’s performance-based incentives, with a target to increase this to two times total compensation over time. Cash bonuses should be limited to 25% of incentive pay and based on non-financial and strategic measures.

Secondly, companies should be required to publish a fair pay charter explaining policy and outcomes for wider employee pay and fairness and to engage with employees on its content including specified disclosures on pay comparisons.

Pay ratio

However, the report states that the disclosure should meet public demands for transparency, and explanation, of the disparity between CEO pay and worker pay, but this should focus on relative trends in actual pay and pay opportunity over time rather than on a snapshot ratio. It also says employees should not have a formal say on pay packages.

It states: ‘Pay ratios do not lend themselves to valid comparisons between companies, even within the same industry, and would likely add to misunderstanding over executive pay as well as potentially creating perverse incentives – also would fuel excessive negativity over pay, when we need great leaders to create our great companies.

‘Pay ratios may lead to pay being decoupled from performance, in favour of being linked to median worker pay.

‘Any statistic about pay relativity must be set in the broader context of a company’s approach to fairness, which may be defined by external as well as internal relativities, as well as by contribution, and so the fair pay charter should be broader than statistics.’

The third suggestion is that the directors’ remuneration reporting regulations should be updated to enable greater stakeholder understanding of a company’s maximum pay and relationship between pay and performance. Disclosures should show over each of the last five years of the change in ‘total company wealth’ of the CEO.

Finally, the report suggests a binding shareholder vote regime on executive pay should be triggered when companies lose, or repeatedly fail to achieve a threshold level of support on, the advisory remuneration vote. This would happen if a company loses the advisory remuneration vote in any year or receives 25% or more vote against the advisory vote two years in a row.

This proposal runs counter to calls for universal binding votes on pay, including those made by Theresa May just before she was named prime minister, and the report states: ‘Introducing a binding vote for all companies every year is a disproportionate response to this problem, and would be likely to have many negative unintended consequences. Therefore, it would be better to design an escalation approach such that only those companies showing an inability to sustain high levels of shareholder support would trigger a binding regime.’

The Purposeful Company Interim Executive Remuneration Report is here.